Top 5 reasons why this defence stock is down

[00:00:00] Hey folks, CA Rachana Ranade here and I welcome you all to another episode of Finance Simplified,

[00:00:05] the podcast which is about MTAAR technologies we are going to try and understand as to why this

[00:00:10] stock is down by almost 33% from its all time high. So let's get started.

[00:00:18] You know why I specifically thought about taking this defense stock many people were asking

[00:00:24] you know, ma'am please tell us about this defense stock and we need to understand that when

[00:00:27] the entire sector is really hot when the entire sector is really rallying what is wrong with this

[00:00:32] stock and first and foremost I thought that I should try and really bring this to the notice of

[00:00:38] all my viewers that should we really categorize this company as a defense stock or not and for

[00:00:44] that we need to understand the revenue breakup of this company. The company gets revenues from

[00:00:49] four five different areas one is clean energy, civil nuclear, clean energy fuel cells and others

[00:00:53] space defense products and others okay and then it is a total FY23 figures percentage wise

[00:00:59] maximum revenue is generated from clean energy fuel cells and others and defense contributes to

[00:01:05] only 2.64% of the total revenue this is as at FY23 so, okay does some revenue come from defense sector

[00:01:13] yes but we should not label this company as a defense company I hope this first month is clear

[00:01:18] but then you might be like, but then what does the company do if they are selling something to all

[00:01:23] these sectors what do they actually do I just tell you in simple what does it do in simple what's

[00:01:28] they manufacture certain components these are engineering components okay and these components

[00:01:34] are used in various industries which industries that is what I told you right now now

[00:01:39] industries like clean energy related industries space defense in all these industries their

[00:01:45] components are want to be used now one important point is that their components the company

[00:01:50] the company which manufactures these components these components are precision components means what

[00:01:55] the accuracy has to be high and there has to be consistency that is why they have mentioned

[00:02:00] that tolerance will be just 5 to 10 microns so, it has to be really consistent it has to be really

[00:02:04] accurate then next question comes up is to whom does the company actually sell their components

[00:02:10] their engineering components you will understand that oh my god company has some impressive clientele

[00:02:15] maybe tata's or directly drd or rafal hl so many so many someone called this blue

[00:02:21] energy I am going to talk about this in the next section now let's start with the reasons as

[00:02:27] to why this stock plummeted by more than 33 percent from all time highs and the very first reason

[00:02:32] that I can think of is about the quarterly results now whenever I talk about quarterly results

[00:02:36] number one you have to understand that we have to analyze the numbers which are present in the

[00:02:41] quarterly results and number two we have to also understand what is the management guidance or

[00:02:46] what is the management commentary which is generally a part of the management con call okay so,

[00:02:52] we are going to try and analyze both we are going to check q 2 and q 3 first let's understand

[00:02:58] about some key points about q 2 because when they came up with their quarter two numbers on 9th

[00:03:03] of November 28 23 the stock plummeted by more than 11 percent now what happened here was that

[00:03:09] the numbers were not that bad in q 2 problem was that the guidance that they gave was not really

[00:03:14] appreciated by the market company negatively revised their revenue guidance from 830 to 860

[00:03:20] crores in q in f y 24 to 670 to 700 crores okay so, in simple words what did the management say

[00:03:28] that we expect lesser revenue okay also they mentioned that EBITDA guidance which was originally

[00:03:36] at 28 percent they said we would want to revise it at 26 percent for f y 24 and this was also

[00:03:42] also not liked by the investors so, in terms of sales revenue and in terms of EBITDA margin both

[00:03:48] were revised negatively both were revised in a downward direction now we need to understand

[00:03:53] now the fresh revenue estimate was around 672 700 crores what happened in the q 3 results

[00:03:59] the q 3 results were you know disclosed on the valentine state control control control you know

[00:04:07] what happened it was a hard break okay why because even though it was red but valentine's red is not

[00:04:16] to be considered good this time red means it's not considered good in the stock market because

[00:04:21] on 14th of feb after the results were declared the stock tanked by almost 9 percent now here we

[00:04:26] need to understand what all things happened did the numbers also speak up badly and also what

[00:04:32] about the guidance so, let's understand about the numbers and be it operating income q oq basis

[00:04:36] or y oi basis q oq down by 29 percent y oi down by 26 percent I'm talking about operating income

[00:04:42] right if I talk about EBITDA EBITDA down q oq by 33.9 percent y oi by 47 percent and even net profit

[00:04:49] is down by 48.9 percent q oq and y oi 66.8 percent down huge dip in the numbers itself well

[00:04:59] what about the guidance now if you remember the guidance which was revised revenue guidance

[00:05:04] which was revised to 672 700 crores now further got revised at a point lower to 610 crores

[00:05:13] so I hope your understanding that back-to-back management kept on giving lower quarterly guidance

[00:05:19] kept on giving lower revenue guidance and this was not definitely appreciated by the investors

[00:05:24] on top of that this time management said we would not want to you know specifically talk about

[00:05:28] EBITDA numbers and they have not given any guidance about EBITDA in their q 3 earnings call

[00:05:33] now when I checked what was the EBITDA q 2 guidance for so, in the q 2 guidance basically

[00:05:39] what was the number of EBITDA margin that they had given for f y 24 the number that they had

[00:05:44] mentioned was 26 percent plus or minus 1 percent so basically what management was telling that

[00:05:49] for f y 24 our EBITDA would be from in the range of let us say 25 to 27 percent but when I

[00:05:55] checked EBITDA for 9 months ended I found out that it is standing currently at only 21.6 percent

[00:06:02] so it means that whatever guidance has been given that has also not been met by the management

[00:06:07] so obviously it was not taken up positively by the investors now you imagine this sales numbers

[00:06:13] going down guidance going down EBITDA numbers going down and P E of the stock is around 72

[00:06:20] a big learning for all the investors is that whenever P E is very high and if the company

[00:06:26] is actually revising the estimates upwards is beating them is giving further higher up estimates

[00:06:31] is again beating them still higher P E is okay but if you are already at a higher P and you are

[00:06:36] revising the numbers downwards it will not be able to sustain that high P E and the stock price

[00:06:41] ideally corrects now let us move on to the second reason which is client concentration now when

[00:06:48] we try to check the management con call we found out one line there which mentioned that blue

[00:06:53] energy was one of their clients and this client deferred the shipment and they mentioned that

[00:06:59] that client was shifting or transitioning from old tech to new tech okay now when I actually read

[00:07:06] this I said is it only because of one client that the revenue guidance was revised from almost 860

[00:07:12] crores to 610 crores so is there a possibility that this client could be a significant one because

[00:07:18] they had mentioned the name of this client in the con call now I tried to check it but the

[00:07:23] presentation or the con call did not mention the overall dependence on this single customer or

[00:07:29] the percentage of revenue generated from this customer that is the reason why me and my team

[00:07:33] we started to dig down into other details that is there any other report in which we are getting

[00:07:37] some information or not and that is where we came across a crystal report dated 30 June 2023

[00:07:42] and in that it was mentioned that the this company is highly dependent on a single client

[00:07:49] which is bloom energy which is a global leader in solid oxide fuel cells but the revenue contribution

[00:07:55] this important point revenue contribution of this client has been consistently over 60 percent during

[00:08:01] fiscal 2019 to 2023 with the exception of 21 where the contribution was about 50 percent but

[00:08:07] the share of bloom energy in overall revenue mix will remain above 60 percent over the medium term

[00:08:14] now can I say this is like one single client actually generating a lot of revenue for the company

[00:08:21] and answer is obviously yes now we said if this is such a big client we need to know a little bit more

[00:08:26] about this client and mere google search we just try to see what were their numbers because of

[00:08:32] course it's not an Indian company and typically in the western countries everyone knows that

[00:08:36] calendar year is equal to financial year it was mentioned that US hydrogen firm bloom energy

[00:08:41] posts 209 million loss for 2023 so this is the full year ended correct for entire year ended

[00:08:48] 209 million dollars loss and with nearly four billion dollars deficit which was accrued to date

[00:08:55] is that a big number answer is obviously yes in fact the story doesn't end here it is also it

[00:09:01] was also mentioned that the company's CFO was set to resign now I said oh rebar so much

[00:09:08] so much points but how has the stock price of this company performed the stock price of this

[00:09:12] company is corrected by more than 55 percent in the last one year itself and in fact it was also

[00:09:19] mentioned in one of the reports that this company bloom energy is set out for a restructuring plan

[00:09:25] which was approved in September 2023 they're also reducing its workforce they have actually laid

[00:09:31] off more than 200 full time stuff and 56 contractors oh my god is that is that a big one yes so I hope

[00:09:39] you have understood how can you research about a specific reason for downfall and we started with

[00:09:46] what client concentration we came up to one name we tried to understand how much revenue was

[00:09:50] contributed by that client and we then also understood what is the financial performance of

[00:09:54] that client now if you remember I had said that overall revenue contribution of the company 77 percent

[00:10:01] is contributed by clean energy fuel cell segment and this company bloom energy falls into the same

[00:10:07] segment so I hope you are understood the second reason for the downfall in this stock now let's move on

[00:10:12] with the third reason and it says increase in working capital days now if you don't know what a

[00:10:18] working capital days invest in investor media basically gives a very simple explanation of that

[00:10:22] it measures the average time it takes a company to convert its inventory and receivables into cash

[00:10:28] I'll try and simplify this further assume that the company is inventory okay they sell it

[00:10:32] how much days will be required to receive that cash okay plus assume that company has receivables

[00:10:39] means what they have already sold it and money is yet to be received from the customers

[00:10:43] within how many days are they able to receive this money from the customers so simple

[00:10:48] ideally earlier the better so lower the better is the thumb rule now let's see what is the company

[00:10:55] I mean what are the companies numbers speaking of again we have taken this data from their investor

[00:10:59] presentation total working capital days have been continuously increasing and they have gone up from

[00:11:04] 230 days to 278 days to 233 days and to 300 and two days so is this a good sign answer is obviously not

[00:11:12] so what does the interpretation suggest it means that if their working capital days are increasing

[00:11:18] there are great chances that the company is not able to fulfill their existing working capital

[00:11:25] in simple words they are not easily able to fund the day to day operations of their company

[00:11:29] with the existing cash now to solve for this what are the options available with the company

[00:11:34] obviously possibility number one they can take a borrowing possibility number two they can sell

[00:11:38] equity and they can raise funds let's see if their borrowings have gone up and let's also see

[00:11:44] if the promoters holding has also gone down or not we'll go one by one first we'll focus only on

[00:11:50] FY 20 to FY 23 their long term borrowings has been continuously increasing and it has gone up from

[00:11:56] 0 to 77.72 crores and if I'm talking about short term borrowings it has gone up from 29.13%

[00:12:04] to 65% sorry 20.9.13 crores to 65.63 crores and is that a big one answer is obviously yes okay

[00:12:14] the promoter holding has been going down from December 22 to December 23 and have gone down from

[00:12:19] 47.18% to 37.26% so as the holding gone down continuously yes promoters have also pledged their shares

[00:12:28] and the pledge percentage was around 6.89% which increased gradually to almost 9.16% as a December

[00:12:37] 2023 now let's move on to the reason four and that is nothing but the overall financial

[00:12:44] material or the financial matrix I'm going to compare quickly four years financial year 20.21.22.23

[00:12:50] you'll be like oh if it does so increasing from 58 crores it has gone up to 154 crores net profit

[00:12:55] that has gone from 31 crores to 104 crores where is the problem now the problem starts with CFO

[00:13:01] that is cash flow from operations which was at 56 crore at 1.10 time and it has gone down to 9

[00:13:07] crores at 1.30 crores and then ultimately right now at again 9 crores

[00:13:12] if you remember I had also talked about working capital days in just the previous section of

[00:13:17] the video and that is where you understood that if working capital days are increasing that is going

[00:13:20] to create a cash crunch and that is what is also seen again in the boring numbers where it has

[00:13:25] gone up from 2.91 crores 243.35 crores one important matrix again is CFO by EBITDA now what does this

[00:13:33] mean EBITDA of course everyone knows I think before interest tax depreciation and amortization

[00:13:37] and because this is before depreciation and amortization which is a non cash expense ideally

[00:13:42] this number should be pretty close to cash flow from operations the number was pretty close in

[00:13:47] FY20 because this ratio of CFO by EBITDA comes from 96.55 percent when as we move by the years you

[00:13:55] will see that from 96.55 percent has gone down to 5.84 percent so thumb rule is ideally CFO

[00:14:02] EBITDA should go as close as possible so closer the better but at FY23 it has gone pretty far away

[00:14:09] from the CFO number so I hope you have understood the fourth reason which is financial matrix

[00:14:14] and let us move on with the fifth reason which is I am not going to tell you the fifth reason

[00:14:19] you have to tell me what is your reason about why this stock is falling everything is not what

[00:14:24] we are spoon fitting this channel is more about making you self empowered so that you are also able

[00:14:31] to do your own analysis you are also able to figure out the reasons for increase in stock prices

[00:14:36] all decrease in stock prices well if you went through this entire property you might have understood

[00:14:41] that we have spoken only about the negative points does this mean that there are no positives

[00:14:45] for this company answer is obviously not of course there are certain positive points for the company

[00:14:49] but this entire was focused on why this stock is actually down by 33 percent from its all time

[00:14:55] higher and it is a reason why we have focused more on negatives thank you for joining us on

[00:14:58] this episode of finance simplified I hope you enjoyed listening to this podcast and also

[00:15:03] found some value in it if you did don't forget to share it with your friends and relatives till then

[00:15:08] take care bye bye